Australia: No requirement that a public benevolent institution must provide direct relief, says Federal Court

Key Points:

To be a "public benevolent institution", an organisation does not need to provide direct relief from poverty or distress – carrying out charitable activities indirectly as a fund raiser may be enough.

More organisations may be entitled to endorsement as a Deductible Gift Recipient or be exempt from fringe benefits tax following the Federal Court's judgment on the meaning of "public benevolent institution" (The Hunger Project Australia v Commissioner of Taxation [2013] FCA 693; Clayton Utz acted for The Hunger Project Australia).

The importance of the issue can be seen from the fact that the litigation was funded under the Australian Taxation Office's (ATO's) test case funding program.

The decision turned on whether a public benevolent institution must give aid directly to those in need or distress. To date, the ATO's position has been that directly charitable activities are a prerequisite. This decision means that there is no such requirement, so that organisations engaged primarily in fundraising activities could qualify as a public benevolent institution.

The Hunger Project Australia's model for helping others

The Hunger Project Australia is a not-for-profit company that forms part of a network of The Hunger Project entities.

The Hunger Project seeks a sustainable end to world hunger through a methodology based on principles of self-reliance, gender equality and participatory local governance. The Hunger Project entities in the developed world raise money to fund hunger relief programs run by its sister The Hunger Project entities in developing countries.

Apart from fundraising, The Hunger Project Australia also participates at the global level in a number of strategic decision-making processes.

It was not in dispute that the objects and the activities of The Hunger Project Australia are charitable. However, the Commissioner refused to endorse the entity as a public benevolent institution on the basis that, as an entity engaged in the provision of funding for independent overseas projects, it does not provide direct relief from poverty or hunger.

The Federal Court rejects the Commissioner's view of a public benevolent institution

The Federal Court held that The Hunger Project Australia's principal object of relieving hunger is achieved through its close relationships with The Hunger Project entities in developing countries.

Contrary to the assertion of the Commissioner, there is no authority for the proposition that the expression public benevolent institution requires such an institution directly to dispense aid.

What next for the tax treatment of public benevolent institutions?

The decision brings some much-needed clarity to an area that has been complex and confused. It also recognises that performing charitable activities on a global scale such as the sustainable end to world hunger requires global cooperation and dependence on the assistance of agents. The decision is consistent with a more modern way of delivering outcomes to the disadvantaged.

As a result of the decision, more charitable entities that are principally engaged in fundraising activities may be entitled to obtain endorsement as a Deductible Gift Recipient, or to access an exemption from fringe benefits tax.

The Commissioner has until 7 August 2013 to file an appeal to the Full Federal Court.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.